Monday, February 20, 2017

The Unsustainable American Dream

I like thinking about cliche stuff. Like what it means to be middle class, and how we're supposed to feel when we get there. And what it means when we talk about "the American Dream," since we spend so much of our lives pursuing it.

Personally, I think the American Dream means providing a better life for your kids than the life you had. We're most often talking about economics: we want our kids to have a better chance at a successful career, to be able to afford a college education, to buy a home, and to live a comfortable life.
But when we define the American Dream as providing a better standard of life for our children than we had ourselves, we are creating an unsustainable goal: one in which each generation's success raises the bar for all future generations. And each successive generation's achievements cannibalize those of the next: the better you do, the harder it is for your children to do even better still. And we'll eventually reach a tipping point, where a future generation can't keep doing better than the one before it.

But before we wax poetic about the American Dream, we should settle on a definition. The original definition seems to come from James Truslow Adams, a Pulitzer winning author of The Epic of America, written in the middle of the Great Depression. Adams described it as"[t]hat dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement."

And while that definition is hazy, it is at least based on our own individual goals and achievements, and focused on opportunity that's available to everyone and anyone. Today's definition of the American Dream seems instead to be based upon a relative comparison. That is, we Americans seem to be comparing our financial situations and opportunities to those of our parents or our children.

To illustrate the point, in a recent Freakonomics episode, Steven Dubner opens the show citing a crazy statistic. While in 1970, 92% of American thirty-year-olds earned more than their parents had earned at that age (adjusted for inflation). Today, only around 50% of thirty-year-olds earn more than their parents had when they were thirty. This is inherently shocking, at least when you first hear it. Why are so few of us earning more than our parents did?

But this statistic is somewhat specious, because any one generation's success at attaining higher wages sets the benchmark for the next generation, making ongoing success harder and harder. The fact that thirty-year-olds in the 1970's nearly universally achieved "the American Dream", means their children are assured to have a harder time of doing the same in the years between the dot-com boom and the great recession. Even if ninety-two percent had somehow out-earned their parents right after the year 2000, they'd only be making it harder for their children to do the same in 2030.

At some point, the bar will just be too high.

Later in the show, professor Raj Chetty outlines another measure of achieving the American dream: how many children born into the lowest quintile of family earnings end up in the top quintile? By this measure, the United States fares pretty poorly: only 7.5% of children in the poorest quintile moved up to the highest quintile. In the UK, that figure is 9%. In Canada, roughly double that figure, 13.5%, move from the bottom quintile to the top.

Or, as Chetty puts it, "you're twice as likely to realize the American Dream of moving up if you're growing up in Canada rather than the U.S."

But by defining what the American Dream means in these relative terms, we are saying that for every person who moves up to the top quintile, someone else has to move down. That is, there can be no more than 20% of a population in the top quintile. If someone's moving up, someone else is moving out.

Now, I am no economist, so perhaps I'm missing the point. But rather than measuring the American Dream in these terms, aren't we just measuring income mobility? And what about the person who is moving down the ladder, from one income quintile to a lower one? Might that person not feel like the American Dream is particularly achievable?

While I'm generally a fan of defining these ideas in relative terms, something feels odd about framing the American Dream in such a way. In the first definition, when someone outearns their parents, that's a completely unsustainable goal: eventually, our progeny just are not going to keep outearning us. In the second definition, where someone from the bottom quintile is moving to the top, we create a truly zero sum game: for every winner moving up, there has to be a loser moving down.

Both of these approaches seem like bad pitches for the quintessential American economic goal. We ought to define the kind of life we strive for in less relative terms.

Why make it a competition between other Americans in the first place? Why try to out-earn our neighbors or our parents?

In this one case, why not aim for an absolute: for something that allows for more of us to actually be winners, and to feel like we've 'made' it? For example, financial independence is a perfectly absolute and definable measure (i.e. - twenty five times your annual spending in investments) that isn't reliant on someone else doing worse than you do. You can achieve financial independence, and it doesn't help or harm your neighbor's chance of doing the same.

Or if that's too rare a goal, why not opt for a basket of milestone goals: purchasing a home, sending your progeny to a public school, getting health insurance for your family, and putting fifteen percent of your income into a retirement account? Maybe that could serve as a version of the American Dream. Again, your achievements here don't really require you to compete with anyone else.

As with most of these things, I have a good idea of what's wrong with the current situation, but only a vague idea of any sort of solution. I get the impression that we're setting up a lot of our citizens to feel discouraged and to feel like they're not doing well enough, because we're defining success as doing better than other people. It's a game with only so many winners, and that's just dumb. While it's naive to think everyone can come out on top, it's just too severe to think of the American Dream as a zero sum game. There has to be a better way.

33 comments:

Your conclusion sounds like the Two Income trap by Elizabeth Warren (before she was 'Elizabeth Warren'. She also pointed out that the basket of goods necessary for a middle class life (housing, health care, and education) is exactly what has gone up faster than inflation.

I think that's why so much of FI work is about hacking those systems or opting out altogether. It's also why we are not in danger of a major part of the population joining the movement.

I need to look into that Two Income Trap book. Thanks for the recommendation!

I know healthcare & education are much more expensive, but I get the impression that housing is still a pretty darn good deal in the US (Financial Samurai has some very interesting stats on that). Still, as you said, the big stuff is what's getting us, even as things like food get cheap.

That's an excellent point: maybe a key driver for why housing pricing is so spiky in our nation. Housing costs are many times higher in certain metropolitan areas (NYC, Bay Area, eastern corridor) where our high earners are also situated, driving up the costs.

hmmm, so much food for thought. I think this is why I feel it's important to keep your side of the street clean. I hate post title such as "How I achieved FI and you SHOULD too" Hey, just wrote a post about that! :) I think one thing unique about this upcoming generation is they seem a bit wiser about choosing their own path, even if it doesn't fall into the same definition of success how how their parents defined it.

Hi Tonya! Love, love, love the "keep your side of the street clean" line. All of my wisdom, and it ain't much, comes from the twelve step programs.

I need to go back and read that post (I unfortunately am only catching about one post every week or two from my blogroll pals, as life has gotten busy). But yes, when we say "should" and set goals for others, it is not great.

And millennials are great at picking their own path, for sure. My wife is clearly one (born in 1986) and I'm unfortunately somewhere on the fence (1980, so either the oldest effing Millennial or a baby Xer), so our worldviews don't line up quite often.

I don't disagree with you about why should we make this a competition, but isn't that part of the "American Dream." I mean Calvin Coolidge said it best "the business of America is business." Of course if that is the case then we are in work slavery forever.

You make a good point about the benefits of competition. It's certainly got a ton of benefits, and if it's a specific type of competition, it brings out the best in all of us (Art of Manliness podcast on this subject in the link below).

But perhaps, and I didn't frame it this way in the post, we need to think about a kind of competition where you don't create one loser for every winner, or set the bar at a fixed point, rather than raising it every generation. Absent that, we should make sure the competition stays out of the 'maladaptive' arena that the AoM podcast highlights.

Great point about houses getting larger and larger over the past 70 years or so: I wish I'd cited that as physical evidence of how we're trying to compete, with each other and with past generations. Is there a more visible sign of your financial success? (Also, we're subject to the same, as we're buying a bigger house as we speak.)

As you said, we should focus on defining our own dreams. Maybe that's the American Dream: defining your own success, and then having the resources and opportunity to go get it.

I agree with PoF - these days it seems like most people don't even know what they really want. Instead we let marketers, our peers, or even our coworkers define our success metrics. And unfortunately we can spend a good portion of our lives trying to achieve those externally defined goals only to realize the bar keeps moving as we work towards them.

Therefore, if we can use our own internally defined success metrics we are more likely to be motivated and actually achieve whatever version of the American Dream we subscribe to!

Agree that we do outsource a lot of the goal-setting in our culture, and the bar definitely moves. (By design, of course...what would that mean for our consumer culture if we actually grasped that bar?)

Hmmm... another very thought provoking post. I totally agree with you that the model is unsustainable and that it sets people up to feel like failures. I guess I take issue with the whole notion that success should be measured financially. Here I go again with all of my neo-hippie, challenge the system sort of thinking - but ultimately I think money is irrelevant. It's merely a tool that helps us achieve the primary goals, which for me are life, health, happiness and fulfillment.

And when I look around me, I see a lot of people sacrificing the primary goals (life, health, happiness and fulfillment) in order to "succeed". I mean, people work crazy schedules, stress themselves beyond belief, deprive themselves of sleep, healthy food, fresh air, exercise and leisure time - all for the sake of making money, a substance which is supposed to give them the very things they are sacrificing to get it! It's just bass-ackwards as far as I'm concerned.

Perhaps we ought to take a cue from the tiny country of Bhutan's "Gross National Happiness Project" and try to start measuring success not through economic factors, but in terms of our actual well-being.https://en.wikipedia.org/wiki/Gross_National_Happiness

You're absolutely right: we're (ironically) getting the money game backwards when we sacrifice all the best things in life in order to get more cash. Just to play devil's advocate though, I do think there's an argument to be made that getting a salary up to a certain point ($70k) has some happiness benefits. But we could absolutely be seeing correlation there rather than causation.

I'll have to check out that Gross National Happiness project, too. Thanks for sharing that resource. Maybe it's a future blog post!

Wow. You really hit home for me here. This post perfectly explains why I latched on to the concept of financial independence. As someone who's parents have done well for themselves, I struggled for quite a while with the idea that I wasn't doing "better" than they were at my age. It seemed like an un-achievable goal.

Then, as is the cliche in this community, I found MMM and latched on to it. Now there was a goal I could work towards that didn't require me to "beat" my parents. Suddenly, I was playing a completely different game.

Since then, I have grown and developed a more nuanced approach to life than simple competition/achieving goals, putting more focus on quality of relationships and things that are a little more difficult to quantify, but I really think you have absolutely nailed the appeal of FI, at least for me and I would wager for a contingent of people as well.

We, too, have followed the cliche path to FI inspiration. From MMM's blog to our own way back in 2012. Financial independence is just a better goal than trying to earn more than your parents or the median household income in the nation, or in your hood. Still, I'd be rocking the rose tinted glasses if I didn't acknowledge that some friendly competition exists in our world, too (though I'd hazard that it's the good kind).

As you said, the real goal at the end of FI is focusing on non-monetary parts of life: more time with family, more time for yourself, self-improvement and developing skills, hobbies, friendships...

Your post is good, but it assumes a level playing field. You simply MUST read "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else". It's not a cult/fringe book, it's a mainstream book.

I didn't actually get all that was going on around me myself until I started earning 1% money and saw all of the tax benefits available to me (and had conversations with my peers about legal ways to shelter). In turn, I know that there are even more methods available in the top 0.1% and still more in the 0.01%.

I don't even have conversations with people about inequality anymore unless they've done tax system history homework.

I'll definitely put that book in the 'to read' list. Though I feel like the competition-based mindset of the 1% and the 99%, and the tax benefits available to one and not the other, might have us falling into the same trap that I tried to write about: namely that we're basing life success based on the outcome of a competition.

So I don't want to put words in your mouth, are you implying that if we see (or make) it less as a competition, then we won't mind if in reality we're getting taken advantage of?

Once you grok the tax benefits, it's like a whole new world of "holy crap", I never knew.Sort of reminds me of the Eloi/Morlocks dynamic in "The Time Machine". The Eloi don't even realize they are the free range livestock of the Morlocks. Is that a better/good life?

Yeah, basically. I mean, you earn what you earn and you pay taxes accordingly. But the way you choose react to any stimuli is the big challenge in being a human. Being mad about a tax system you have nearly 0% control over is ultimately self-defeating. Vote & write your congressman and stay involved, but the simplest and best approach to things that are far, far outside your circle of influence is to focus on the things that are within it.

But we're talking about very, very different things: the post is about the American Dream and how it's defined, or framed. Taxes are pretty tangential to that, wouldn't you say?

I would suggest the American dream is a dream of OPPORTUNITY. It is not that your children will make more money than you, it is that they will have the opportunity to be successful. It is not that your children will be happy, but that they will have the opportunity for such. Not happiness, but the PURSUIT of happiness. And on that note we can certainly measure the opportunities available to us as individuals, as groups, etc.

"Or, as Chetty puts it, "you're twice as likely to realize the American Dream of moving up if you're growing up in Canada rather than the U.S."

Very interesting! I guess it's because to move from middle class to uber rich, you need to start a business or take some big risks with investments. Where as to move from low income to middle class, you need to have a professional degree which gives you a decent income. It's easier to do that in Canada, because tuition is more affordable than the States, so people aren't spending years digging themselves out of debt. Or maybe there's less discrimination in Canada so people are encouraged to try to move up because they know they'll be judged based on merit rather than other factors outside of their control, like race.

Very interesting and thought provoking article! I do think that this "wanting our kids to do better than us" sets up a very high bar for millennials, and when reality doesn't match expectations, it's easy to feel bad about ourselves.

Rather than constantly trying to reach a unreachable bar our parents and society set out for us, we should set our own targets for success and happiness.

Interesting topic and something that I've thought about as well. As a child of immigrant parents, it was expected that we would do better than our parents. But it is understandable in that circumstance where they didn't have the opportunities that I had. For my kids, they may or may not earn more but that wouldn't be how I define success anyway. I really liked Morgan's comment about the pursuit of happiness. As long as the future generation feels like they have that opportunity, all is well. However, if they are weighed down by student loans and higher housing costs, etc...then they will feel like the American Dream is dead.

Yeah, a certain politician really jumped on that framing of the American Dream, didn't he?

My mother was an immigrant, too, and she definitely had the same idea of the American Dream that I wrote about here: my sister and I were supposed to have a better life. That was part of the reason she came here.

But I'm not especially keen on setting the same goal for my immediate family. It's not like I want my kid to try to retire at 35 just to show he had a better upbringing. I want a more attainable/sustainable thing for our kids.

I'm 30 and my income is probably about 1/2 what my dad was making when he was 30. Our household income is probably around 35 - 40%, because my mom worked a full time professional job and my wife works a part time retail job. It has taken me a few years to come to terms with being OK wit not exceeding their success in income levels. There are other ways in which I have a more enjoyable and successful life. My parents worked an average of 50-60 hrs every single week for decades. My wife works only a couple days a week and I routinely have summers off and occasionally winters off. There are other measurements of success of the American Dream than just income. Great thought provoking topic!

Awesome stuff here, DB40. IMHO, the American Dream is about freedom - having the freedom to make what you want to out of yourself, whether that be going to college, working as a garbage man or being self-employed as an artist. Although income certainly is a factor in being able to support yourself, it shouldn't be the sole factor in determining whether or not you've achieved the dream. Joy and doing what you are called to do should count for something. :-)

Thanks, Laurie! The American Dream really is about freedom/opportunities at its core, isn't it? Income seems like a bad measure, yet it's wrapped up in the traditional measures we like to use (home ownership, career, education, cars & vacations, etc. etc.)

I can't really comment too much on what I think the American dream is, not being American, but I always thought it involved fast food, big cars and houses and all the latest bling :) - or at least that is what the advertising companies would have us believe.

So yea to get any sort of decent life, and a shot at reaching FI, you should pretty much do the complete opposite of that. And maybe, nay surely, that is what the real American dream is, to be free, right?

I think income mobility is still a huge deal. However, the ideal question of the American dream is something like, "Is it possible to get ahead with hard work?"

A lot of people don't think so.

In fact, I myself disagree with that statement, but I agree with a corollary statement which is you can get ahead with smart work.

Anyways, ahead or behind shouldn't necessarily be a big deal if we can each define an ideal lifestyle. I think a lot of people embark on lives they think they want without reflecting whether or not they ought to make adjustments along the way.

It isn't unsustainable for one gen to out earn the next as long as the increments involve a steady upward path just like the stock market and historical productivity measures. This is life - certain things should steadily grow. I'm not sure this is framed as a competition routinely, but more just a matter of fact most of the time. How about a blog post on why the drop?

And to the doctor's point, if Americans were earning more I too would hope for small homes.

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.